Does anybody have any familiarity with the Traders Expo (http://www.tradersexpo.com) in Las Vegas.? The Expo is free. Just wondering if it's worth the trip. (I'm a big Vegas fan so I know the city is worth the trip. I'm inquiring about the convention.)

Dave G

Dave,

Absolutely it would be worth going to. I don't know who all is speaking but from your link, it looks like Linda Raschke is going to be there. She's the real deal (another Market Wizard from the second book). If you go, make sure you don't miss her.

Larry

Thanks Larry. I'm in the middle of getting my business set up right now. This would be a great way to mix business and pleasure and could be a tax write off for the business.

Dave G

I went to the Traders Expo in Chicago last month and it was definitely worth my time.

Of course there were about 100 vendors all trying to hawk their online trading tools, but there were also more panels and lectures available than I could possibly attend. It was a treat to hear so many different approaches to finding an "edge", and hearing successful traders and fund managers share their opinions and advice.

Among the most interesting points, I attended a presentation about trading options on volatility only (which still doesn't make sense to me), heard a talk on "tape reading" using level 2 quotes, and had the pleasure of speaking with Chris Johnson from Schaeffer's on techniques for trading QQQ options.

But I'd say the highlight of the experience for me was live mock trading at the S&P 500 pit at the Chicago Mercantile Exchange and the accompanying talk by David Lerman.

Of all the interesting points Mr. Lerman presented, these stand out as being very relevant to this news group:

1. The daily volume (and notional value) of E-mini S&P 500 contracts dwarfs that of the larger S&P contracts and is growing exponentially. As a side note, most of the representatives from the CME are of the opinion that the trading pits may well be gone in ten years!

2. If one learns that a commercial investor is selling/buying S&P contracts, it is not necessarily useful information, as they may be hedging another play.


This raised the following questions:

1. I looked at this week's E-Mini S&P 500 COT data and it is an inverse image of the larger S&P 500 contract. Commercials are net LONG (58% of open interest), while the large investor and the little guy are net SHORT! The value of the open interest reported for the E-Mini contract is not as great as for the big contracts, but given the increasing use of these contracts should the E-Mini data be taken into consideration in determining what the commercials are up to?

2. Are the commercials using S&P 500 contracts to hedge other positions or are they using the contracts for speculating? If they increased their long positions in equities, couldn't they possibly be using S&P futures to hedge the new larger positions?

Todd

i have noticed the inverse relationship that seems to exist between the commerical s&p 500 e-mini futures positions and the full size contracts - and i've wondered whether smart money actually had a long bias or if they were just hedging.

however, look at the non-reportable postion. they are net long. i haven't done a study but i'd bet one could've made decent money simply trading AGAINST them - i.e. when the non-reportables are long, go short and visa versa.

i used to day-trade for a professional firm - the traders there ALWAYS watched the s&p 500 futures and traded WITH them. no one bothered with the mini's or the other indexes.

i'm quite comfrotable being short the s&p. that's just me.

-ja

Todd,

You raised several issues. Let me take them one by one…


The daily volume (and notional value) of E-mini S&P 500 contracts dwarfs that of the larger S&P contracts and is growing exponentially. As a side note, most of the representatives from the CME are of the opinion that the trading pits may well be gone in ten years!.

I would hope the daily volume of the E-mini would be huge. The value of the contract is just around $45,000. That’s nothing. The value of the big S&P contract is about $225,000. So of course the daily volume for the small contract is going to be larger.

However, currently with the E-mini’s, the commercials in that contract have 306,000 longs that have an underlying value of about $14 billion. They have 217,000 shorts with and underlying value of about $10 billion.

Compare that to the big contract. The commercials have 399,000 longs with an underlying value of $90 billion. They have 456,000 shorts with an underlying value of $102 billion.

The E-mini contract is a huge hit among day-trading dentists and floor traders who are only too happy to take their money. But when it comes to the size and quality of the commercial activity, it can’t compare to the big contract.

As far as the trading pits being extinct in ten years is concerned, I’ve been hearing that very same thing for the past thirty years. I guess if they keep saying it, they’ll eventually be right.

If one learns that a commercial investor is selling/buying S&P contracts, it is not necessarily useful information, as they may be hedging another play.

If you’re saying that knowing which particular commercial traders are buying or selling is not necessarily useful information, I would tend to agree with that because by the time you get the information they have already made their play. As far as their hedging activities are concerned, I’ll get to that in a minute.

I looked at this week's E-Mini S&P 500 COT data and it is an inverse image of the larger S&P 500 contract. Commercials are net LONG (58% of open interest), while the large investor and the little guy are net SHORT! The value of the open interest reported for the E-Mini contract is not as great as for the big contracts, but given the increasing use of these contracts should the E-Mini data be taken into consideration in determining what the commercials are up to?

Think about why the E-mini contract came into existence in the first place. I think it was in about 1997. The market had reached unheard of levels. Volatility was enormous. And a lot of really little guys couldn’t afford the margin requirements of the big contract. So in order to attract more business, the exchange developed the E-mini contract which is only a fifth as large as the big one.

According to the Chicago Mercantile Exchange’s own promotional material (I would find the link, but I’m too lazy early this Sunday morning) the E-mini contract was developed for small individual traders and for small commercial traders.

If you’re a big commercial trader like Citigroup or Goldman Sachs or Merrill, are you going to tend to trade the big contract or the small contract? I, for one, am much more interested in knowing what the big commercial traders are doing rather than small commercial traders and day traders.

Are the commercials using S&P 500 contracts to hedge other positions or are they using the contracts for speculating? If they increased their long positions in equities, couldn't they possibly be using S&P futures to hedge the new larger positions?

Okay, this is a great question. I spent about ten years of my career as a financial futures specialist. And I didn’t work with retail accounts. My accounts were institutions – commercial banks, mortgage brokers, the treasury department of corporations, etc. I worked mostly with interest rate futures but equity futures are not much different. My job was to help commercial accounts hedge their interest rate risk. And I would travel the country presenting seminars to teach them how to do that. And then I would end up doing business with a certain number of them.

Now pay close attention to what I’m about to say because it’s important - I have never, ever, not one time, come across a pure, 100% hedger. They will tell you they’re hedging. They will look you in the eye and swear that they’re hedging. And I think they probably believe that they’re hedging. But when you look at what they do rather than what they say you realize that their hedging activities are at least partially based on market conditions. They will tend to hedge more (assuming they are selling futures to hedge a long cash position) when they think prices are relatively high and they will tend to hedge less when they think prices are relatively low. Therefore, they are expressing a market bias within the framework of their hedging activities.

Also, different commercial traders have different motivations for trading futures contracts. Some are flat out speculating. Some are arbitrageurs. Some are program traders. And some are “hedgers.”

Here’s the bottom line. Commercial traders were net long the big S&P futures contract for most of 1986 and all of 1987. And then a few weeks before the Crash of ’87, they went net short. Then at the end of 1987, very close to the bottom, they went net long again. They stayed net long through the great majority of the great bull market of the 90’s. Then they went net short almost at the exact top in 2000, and stayed that way for the next three years as the market sank lower and lower. Then they finally went net long again in March of this year just in time to catch a big rally. And then went net short in late June and the market has been moving sideways since then.

Somebody’s going to have a hard time convincing this old pro that all of that is just coincidence.

Larry

Larry,

Thanks for your response, and your patience! This young novice fully appreciates the opportunity to ask questions to old pros like yourself.

I'm fascinated by the edge one can achieve in the financial markets by watching what certain players are doing. I also see the historical accuracy of this system and have been intrigued since I first started reading the SMR in January. I watched the commercials go long this March and was, of course, delighted to watch the market skyrocket as if on cue.

My question as to whether the E-minis should be watched as well was based on the (possibly too conspiracy-minded) idea that the commercials may be offsetting their standard S&P 500 futures positions via the S&P E-mini in an attempt to disguise what they are doing. I have no idea if this game is that convoluted or if the commercials care who is wathcing them, but I thought I would ask just the same. It seems your answer is that the big commercial traders do not even bother with the E-mini. That would make things simpler for us.

Another note: Lerman indeed said that it was not useful information to learn that a 'specific' commercial trader was buying or selling a large number of contracts. He didn't mention anything about the commericals as a whole, and I didn't ask -- I already have the data.

Also, you confirmed my suspicions about this type of hedging being "biased". To my simplistic reasoning, if the big boys have spent money for good information and have all that financial muscle, how could they not use it at least somewhat aggressively?

Funny to know they've been talking about the demise of trading pits for awhile now. Maybe that's just as likely as getting rid of jockeys at horse races.

Thanks again,
Todd